Ever since the nationwide 5G rollout that the Malaysian government was actively executing, there has been a general uptick of activities in the telecommunication tower industry. In order for there to be nationwide coverage of 5G network, more telecommunication towers are required to be erected across the countries. The increase in demand for telecommunication towers attracted investments into the industry, which prompted both the consolidation of many smaller telco tower operators, and the acquisition of telco tower assets and companies by institutional investors.
In this article, we are going to take a look at the top four (4) potential issues to take note of for investors looking to invest in the Malaysian telco industry.
- 1. Valid and Subsisting Network Facilities Provider Licence
- Telco tower operators in Malaysia are required to secure a network facilities provider (“NFP”) licence with the Malaysian Communications and Multimedia Commission before they can own and operate any telco towers. Each NFP licence is typically valid for five (5) years, and is renewable subject to the payment of renewal fees. It is thus important for any investors to verify that the target company’s NFP licence is still valid and subsisting, and that all the conditions stated thereunder are being complied with and observed by the target company. Some of the conditions being imposed under an NFP licence are foreign and Bumiputera shareholding requirement, contributions to the Universal Service Provision fund, payment of annual licence fees, limitations on the type of facilities approved, and so on so forth.
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- 2. Having the Appropriate Permit for Each Towers
- In Malaysia, the erection of any telco towers is subject to the issuance of building permit by the relevant municipal or local authorities. Essentially, the telco operator is supposed to have applied and received a building permit for the erection of each and every telco tower at their respective sites before doing so. Any telco towers that has been erected illegally may expose the company to financial penalty by the local authorities or worse, be subject to a demolishing notice. The application for a building permit with the municipal or local authorities can be a tedious and slow process, which is why many telco operators tend to erect the telco towers while the application process is still underway. Before undertaking any investment in a telco tower company, it is crucial to verify the number of telco tower sites that are operating without any permits and assess the likelihood of permits being issued for these sites in the future, so that appropriate conditions or risk mitigations can be put in place in the transaction documents to protect the interests of the investors.
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- 3. Thorough Review of the Site Tenancy Agreements
- The sites on which the telco towers are being erected are usually being occupied by the telco tower companies under tenancy or lease agreements with the land or property owners. During legal due diligence, it is also important for the investors to ensure that each of the telco tower sites is being occupied with a valid and subsisting tenancy or lease agreement. From time to time, some land owners might actually include a rental “step up” mechanism in the tenancy or lease agreement to allow a fixed percentage of rental increment every 3 to 5 years. It is thus imperative that investors take this into consideration when calculating the tower cash flow of the telco tower portfolio of a target company.
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- 4. Thorough Review of the Tower Licence Agreements
- Telco towers are usually licensed to telco operators or network service providers (“NSPs”) in order for them to install their network equipment on the tower structures. The licences are typically firmed up under licence agreements or access agreements, which would allow the telco tower company to collect monthly licence fees from the licensee. Due to space constraint, each telco tower can typically host up to three (3) or four (4) sets of network equipment, from different telco operators or NSPs. The industry practice is for there to be a licence fee “step down” mechanism whenever there is an increase in the number of collocators on the same tower, resulting in there being fluctuations in the receivables by the telco tower company for each tower. Likewise, the fluctuations in the tower licence fees will directly impact the target company’s tower cash flow and careful assessment of the number of equipment on each tower is required.
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Acquisition or investment into an existing telco tower portfolio or company can be expensive depending on the size of the telco tower portfolio. We cannot stress enough the importance of a thorough legal due diligence on the target company or portfolio to be acquired. Risks and irregularities need to be identified and flagged accordingly during the due diligence process so that effective deal structuring and appropriate risk mitigation can be done to protect the interests of the investors or purchasers.
The Technology Practice Group at HHQ frequently work with companies from the telco industries with matters ranging from regulatory compliance to commercial transactions. We are certainly equipped with the necessary skillsets and industry knowledge to assist you in your telco related matters. Please do not hesitate to reach out to the partners and heads of the Technology Practice Group for more enquiries.
About the authors
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
ky.lo@hhq.com.my.
.
Ong Johnson
Partner
Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”),
Fintech, TMT Disputes, TMT Competition, Regulatory
and Compliance
johnson.ong@hhq.com.my
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